Countries of the World/COUNTRYS.BIN/dp/0286/02863.txt

Text File | 1991-06-25 | 14KB | 238 lines

$Unique_ID{COW02863}
$Pretitle{242}
$Title{Peru
Chapter 3E.   Balance of Payments}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{economic
balance
government
payments
debt
export
international
new
public
prices}
$Date{1980}
$Log{}
Country:     Peru
Book:        Peru, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1980

Chapter 3E.   Balance of Payments

     Peru frequently has had serious balance of payments problems. The
country's relatively diversified exports, although highly concentrated in
primary commodities, were usually the cause as well as the solution of the
problem. During periods of rapid export expansion (because of exploitation
of new products such as guano after the 1840s and fish meal after 1950,
completion of investments permitting greater production for export, and
higher world prices for primary commodities) the flow of funds increased
from foreign financial institutions and multinational corporations. When
the export boom slowed or collapsed, most often because of shrinking
international demand and lower world prices, the country was left with a
substantial debt to service.

     At various times the foreign loans had financed productive investments
that helped to repay the debt, but funds borrowed abroad at times went into
investments that were slow to produce a return (such as the railroads in the
late 1800s) or financed domestic consumption and capital flight. The country
has had several financial crises when the foreign debt could not be serviced
under the original terms. Default on international obligations has been
avoided by rescheduling the debt, and repayment was accomplished by the
eventual recovery of export earnings.

     As of mid-1980 the most recent and most serious balance of payments
crisis began appearing in the mid-1970s. The previous crisis occurred in
1968, resulting in a stabilization program and a much improved balance of
payments situation by 1970. At the same time, however, the government was
becoming much more active in the economy; while national savings declined,
interest rates became negative because of inflation, and a fixed exchange
rate was being maintained. Between 1971 and 1975 the government stimulated
the economy with massive consumption subsidies, measures to redistribute
income, and large increases in public investment that averaged 25 percent
a year. Imports rose faster than export earnings, requiring rapid expansion
of foreign borrowing. Between 1971 and 1975 the resource gap increased
from 0.4 percent to over 11 percent of GDP, and the external public debt
more than tripled.

     The adverse trade balance peaked in 1975 at US $1.1 billion partly
because of a deterioration of the terms of trade of nearly 30 percent (see
table 11, Appendix). While import prices were rising, export prices
declined, particularly for copper and sugar. Even though the adverse trade
balance improved, the current account deficit remained high between 1975 and
1977, averaging US $1.2 billion a year-equivalent to 9.5 percent of GDP.
Drawings on international reserves and foreign borrowing, much of it on
short-term from foreign banks, financed the current account deficit. By the
end of 1977 the country faced a severe financial crisis. Net international
reserves had a negative balance of over US $700 million, international cash
reserves were sufficient for only a few days of imports, and the total
external debt was nearly US $8.3 billion (see Role of Government, this ch.).

     After 1974 the government began measures to reduce fiscal deficits and
the loss of reserves. Imports were restricted, subsidies on imported
commodities were reduced, interest rates were raised, and the fixed exchange
rate policy was abandoned in favor of a series of devaluations-most of which
were frequent mini-devaluations. The measures, endorsed by the IMF, helped
the balance of payments, but contributed to a fall in real wages of workers;
they were insufficient, however, to avoid the financial crisis of late 1977
and early 1978. In May 1978 new officials were installed to restore economic
equilibrium.

     Improved economic management contributed to a turnaround in the balance
of payments. In 1978 the trade balance became positive, largely through a
reduction of imports because of the country's economic recession and small
military imports. Officials negotiated a restructuring of the external debt,
which along with the repatriation of some Peruvian capital provided a small
increase in international reserves.

     The balance of payments improved tremendously in 1979. Exports exceeded
imports by nearly US $1.4 billion as large increases in world commodity prices
along with expanded petroleum exports boosted export earnings while imports
expanded slowly. Much of the favorable trade balance went abroad as interest
payments on the external debt. Nonetheless, large foreign loans to the public
sector along with debt relief permitted net international reserves to increase
by nearly US $1.6 billion. As the balance of payments improved during the year,
authorities decided not to use part of the debt relief they had negotiated.

     As civilians again took over the government in mid-1980, the country's
balance of payments position was strong. How long it would remain so would
partially depend on the management abilities of new economic officials. Debt
repayment would remain a serious burden until 1986. Imports were expected to
rise as the economy recovered. The substantial help that petroleum provided
in export earnings by the late 1970s was expected to disappear before the
mid-1980s unless new fields compensated for depletion of older fields and
expanded domestic consumption. Moreover, the high export prices for primary
commodities in 1980 could be quickly reversed as had happened often in the
past. The boom and bust cycles would continue with another financial crisis
in the not too distant future unless officials improved on past economic
management and accomplished some structural reforms.

Economic Legacy of Military Rule

     When on July 28, 1980 elected civilian officials began heading the
government, they were confronted with the same long-term problems that had
been present when they were removed by the military in 1968. The high rate
of population growth meant an expanding labor force requiring more rapid
creation of new jobs than in the previous several decades. A process of
elimination indicated manufacturing had to be the main source of new
employment. Mining could not absorb many workers even if massive new mining
projects could be financed and instituted quickly. Because of the limited
land resources, agriculture was not capable of absorbing many additional
workers, particularly if the goals of raising rural incomes were retained.
Services could provide some new jobs, especially in such labor-intensive
activities as transportation, warehousing, and tourism, but the service
sector could only share the burden with manufacturing if productive work
with adequate wages were provided.

     Other long-term problems included rapid urbanization with an increased
demand for housing, utilities, and other services (see Urbanization, ch. 2).
Although the country as a whole possesses a plentiful supply of water, the
increasing concentration of the population in the Costa will require costly
projects to bring it from the eastern side of the Andes. The country's 1980
crude oil surplus will be short-lived unless new fields are discovered; if
large oil imports become necessary after the mid-1980s, close attention to
energy matters will be required if deterioration of the balance of payments
is to be avoided.

     The considerable success of the military government in altering the
ownership pattern in the economy left relatively untouched the skewed income
distribution and problems of the poor. The expansion of the public sector,
however, had developed institutions and personnel experienced in large-sc